What Can Virtual Goods Teach Us About Paying for News?

Why will people spend $1 to send you a virtual beer on Facebook, but not to read a news story online?

On the surface, it defies logic. I think most people would agree that whatever economic value news and information has, it’s greater than a virtual piece of clothing, or something that gives your avatar a special power in a gaming environment, or that gives you elevated status on a social network. But in terms of consumers’ actions, the exact opposite is true.

I’ve been thinking a lot about this issue because the market for virtual goods has exploded. People are expected to spend $1.6 billion on virtual goods this year in the U.S. alone. The emergence of this market, I think, is one of the most important business trends on the web. In Silicon Valley, it’s reshaping assumptions about online business models. As the focus on ad-driven models loses favor, the virtual goods market is generating a lot of interest.

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Lessons for the News Business?

Does the rise of the virtual goods economy have any lessons for the business of news and information? I think so, but I’m not sure exactly what they are. And that’s why I’m writing this post. I want to share some of my thinking about virtual goods and news. I’m throwing it out there in hopes of sparking a discussion, or catching the eye of some entrepreneurs (or future News Challenge applicants?) who might take this a step further.

The phenomenon of virtual goods confounded and fascinated me for a long time. I couldn’t get past the absurdity of spending money on such trivial things. And part of me was in denial that so many people were doing it.

My thinking began to shift when I visited the folks at Second Life last fall. It’s a company that had been written off by many, but which is in fact still growing and is profitable. Rather than rely on advertising, the “in-world” economy revolves around the buying and selling of virtual goods. This revenue stream has continued to grow and enabled Linden Lab, which created Second Life, to do just fine during the economic downturn.

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Consider, also, the success of Zynga, the social gaming company that created mega-hits Farmville and Mafia Wars for the Facebook platform and other social networks. From nowhere, Zynga has grown to 750 employees in just 2.5 years, and has 300 job openings. That means it’s almost as large as Facebook, which has 1,100 employees. One of Zynga’s prime sources of revenue is virtual goods.

Or check out this interview that TechCrunch’s Michael Arrington did with the founder of Slide, Max Levchin. In this chat, Levchin explained how Slide, which makes many of the most popular widgets on Facebook, has moved from an ad-based business model to one built around virtual goods:

Levchin discusses the “shift from advertising to virtual goods” and reveals that most of Slide’s revenues now come from sales of virtual goods, whereas it was the reverse a year ago. Slide makes some of the most popular apps on Facebook and other social networks, and the fact that it is no longer focussed on advertising says a lot about the prospects for social ads.

The True Value of Virtual Goods

The person who helped me begin to get my head around this was Susan Wu, a virtual goods pioneer and former venture capitalist who has started an online gaming company called Ohai. Here’s what she understood early on about the value of virtual goods: In the real world, we have all sorts of intangible interactions, from shaking hands to smiling to offering blessings. The value of virtual goods is not about the object, but rather its ability to express an emotion or feeling in a way that has value.

“Sending someone a virtual beer is not about the beer,” Wu told me. “It’s a way to show, ‘I have an affection for you.’ It’s the same reason people have bought bouquets or other ostentatious gifts — to demonstrate a feeling.”

She pointed me to a post, “Virtual Goods: The Next Big Business Model,” she wrote for TechCrunch outlining her vision of virtual goods. That was published in 2007. It’s a good starting point if you want to dig into this topic.

Applying it to News

I’ve been trying to apply this framework to news. I think it provides an interesting, and different way, of thinking about where the true value lies: Not in the thing itself, but in something adjacent to the thing, some feeling you have about it, or something you can do with it in terms of expressing yourself.

Is there a feeling or emotion or something around consuming or sharing news that possibly has some value that can be captured and expressed?

Are there virtual goods that news organizations could create that would entice people to spend some money?

And are there models in social gaming that provide structural lessons for news organizations of all shapes and sizes that would demonstrate better and more powerful ways to harness the power of social networks?

I think the answer to all of these questions is, “Yes.” But that said, I don’t really know. It’s still a considered hunch at this point.

I do think this convinces me that, in terms of business models on the web, we are still in early days. There’s been a lot written here, and elsewhere, that the search for business models is futile. I would agree that there is no single revenue stream that will ever replace the classified, ad-based model. I think most news organizations that are sustainable will have to be built on a vast array of revenue streams.

I’m wondering if virtual goods is one of them. What do you think? Do virtual goods have anything to teach us about the economic value of news and information?

There’s sure to be something. I think with these things is the key aspect of creating a community. Once a community is created, the community kind of dictates how such a concept can work within each community.

Great thoughts, Chris. I wonder what the equivalent virtual good people would be buying related to a news story. Would they be sending a virtual Pulitzer to the reporter? A virtual tomato to the subject of a story about corporate fraud? I wonder if the virtual goods would be directed at people working for the news outlet or the subjects, and tend to think it works better for subjects.

Is this another sign that the advertising industry is being turned on its head? Good ads strike an emotional chord, with the hope that a consumer will purchase a physical good. In this new world, that emotional chord IS the product. It has cut out the middleman of physical product. Did anyone ever really want that new car, or did they want to feel like they were in control of powerful machine?

Think about the manufacturing implications. No physical overhead. No shipping. Fewer human resources.

Can news organizations produce and sell virtual goods? If we look at current virtual goods models, the platform and game developers are the ones making money. Will news companies have to develop and nurture a social network and or software to be profitable in this space? Is that something news organizations are equipped to do? Is it something they should do?

If the news orgs can pull this off, I think it will have to be without journalism. But maybe this side of the business can fund journalistic endeavors, similar to how ads once effectively funded the work of reporters and editors.

Abandoned tangent: Music has always been a virtual good. It has only recently been unbound from the constraints of a physical container.

With virtual goods, the buyer generally knows what he or she is getting, and thus can make an informed purchase decision.

With news, the buyer doesn’t know the full story until after the purchase, making it harder to justify paying beforehand.

The prospect of paying for something that turns out to be worth less than one expected will deter some portion of virtual transactions involving news.

The problem will be compounded by the fact that many stories, like cheap hot dogs, have too much filler. It’s a legacy of the print era when word counts had to be increased or decreased to fit the printed page.

Today, many news stories convey most of their informational value in the headline and first graf.

Finally, many news stories today are even less necessary to one’s life than virtual goods.

@Mark: It could look a bit like that, in fact. There needs to be some element that it lets you express something, and perhaps gain status by sending or receiving it within the “news” community.

So for instance, folks always say that it’s hard to sell relevant ads against stories about something like a suicide bomber in Afghanistan. But what if there was some way to read the story, comment on it, but also “purchase” a virtual good of some kind that allows you to elevate the story because you think it has greater news value, so that it’s ranked higher on the main page so more folks might read it.

Maybe by doing that, you also elevate your status as someone who is interested in a topic, or so your comments are given a bit greater prominence. Or maybe you unlock badges, like 4square, based on the number of comments you submit, if they are voted up by others, etc.

Likewise, if the news platform were also a social network, you could reward the other best commenters and as well as reporters for thoughtful ideas or stories by sending them avatars or virtual goods that they might collect.

Ideally, this network is integrated with platforms like Facebook and Twitter so these gifts can be given and displayed across a number of social networks.

@Thomas: Just to be clear, I’m not saying that you buy a virtual good in order to read the story. The news story would be free. So you would see it, and make a judgment on its merits. The question from there is whether there is some impulse around feeling, sharing or discussing it that can be captured by a virtual good, or badge, or some kind of avatar that then has value that you’re willing to spend money on.

(see me response to @Mark above).

patricia

Virtual goods are driven by value. Subscription content historically over platforms (print, TV, etc.) has always been driven by value. The reason why media is having such a hard time is because it decided for its customers to give what was once deemed valuable enough to pay for free. Now it has to find what is of value to those customers, make it and charge for it.

“I think most people would agree that whatever economic value news and information has, it’s greater than a virtual piece of clothing…”

Richard Stallman introduced the concept of Free Beer vs Free Speech — that while we might like a free beer, our very way of life is dependent on free speech.

I honestly believe that.

But I can tell you, most people take free speech for granted… yet they’d walk miles for free beer.

In his 2002 “Google AdWords Happening” Christophe Bruno discovered that (per Google pricing) the “price of freedom” was hardly “Eternal Vigilance” but rather a mere US$1.88/day – by contrast, the price of “Free” was US$7,569.23/day!

We claim to cherish Freedom… but what we really want is a Free Beer.

Similarly… You may VALUE news more than virtual goods… but to project your values onto actual mass public behavior is, by your own observations, not correct.

People “claim” to watch profound Public Television, the ratings show that they watch banal Reality TV.

etc.

So, virtual clothing and the other items you describe are, in fact, more valuable to a lot of people.

Later in the article I think your “bouquet of flowers” and “handshake” ideas are more likely accurate. We do spend a lot of money, as much as we possibly can, entertaining ourselves.

Most people do not use their diamond rings to cut glass, so the properties of the little tiny chunk of glass on their finger are almost entirely conceptual or social… yet we spend astronomical sums on such items… is a diamond ring more like a great newspaper? or more like some nice virtual clothes.

The distinction between, for example, Facebook & Second Life is interesting. A virtual beer gift is the electronic equivalent of a paper postcard to a friend.

But in a Virtual World, your avatar is a unique identity. For some that virtual identity is closely linked to a physical identity, for others, it’s completely separate. But either way, it is still a unique identity.

Even when linked to “RL”, your virtual identity is still a unique one — just as you inhabit a different identity with your Parent vs your Child… your lover vs your co-worker… your boss vs your employee, etc..

AND… we adorn those identities in way that please us or in ways that we believe will bring power or status or an aesthetic sensibility to us.

Armani suits are not more resistant to wear than Men’s Wearhouse suits, yet they cost thousands of dollars more – that aesthetic difference is in essence a conceptual or virtual difference. Virtual clothes are worth real money in the same way that any clothes that have a double-digit price tag or didn’t come from a thrift shop, were selected partly for functionality, but largely for style, ambiance, status, and other intangible, virtual qualities.

Until you understand that we are not talking about “Real VS Fake” but “Physical vs Virtual” and that the Virtual IS Real — then you can’t expect to understand and thrive in the new economy.

If the last time you ever spoke to your grandmother was by telephone… then it was a “virtual” conversation… it did not happen in any “physical” place… but it could have been among the most meaningful, among the most “real” conversations in your life.

1.6 billion on virtual goods! An embarrassment of riches in a world where many people eat one meal a day. I wonder what percentage of that will be wasted by Americans. Anyone want to buy a virtual bridge in Brooklyn? Even in public radio, when people donate money, they get something real in return: the service that measurably improves the quality of their lives, even if they skip the optional thank-you gift.

Very interesting topic and worth exploring for the news industry. I think there’s a lot of potential for mashing up news sites and gaming sites that has not been adequately explored yet – especially for the under-30 crowd.

Virtual goods with the news business would work best if sold by advertisers. Miller Lite could allow readers of a news site to send a virtual round to friends via a tag at the bottom of the article on a new beer. To sell virtual goods to readers of regular news articles, you must create an enclosed community that readers have to buy into.

I’ve written a lot about virtual goods and most people who buy stuff belong to a community like Club Penguin, World of Warcraft or Second Life. One site that has done a good job of integrating advertisers into its site is Whyville.com – an education site geared to educating kids.

Chris: Great post! … I expect that news traditionalists will scoff, but I think you’re onto something. Instead of MiamiHerald.com putting a “please donate some money so we can keep producing important journalism” plea at the end of stories as an extra revenue source, a virtual-goods approach might bring in more money. Buy the reporter of a story you loved a virtual beer for $1; or in lieu of a private e-mail to the writer, send an e-card with a (positive or negative) sentiment for $1.50; etc. Put the money in the newsroom budget.

I know what the reaction will be to this from older journalists, but let’s face reality and do what we have to, including using persuasion techniques like virtual “goods” to get people to spend on quality news.

This idea actually might fit into some research I’m about to start on donation models at my new thing, the Digital Media Test Kitchen at CU-Boulder. If anyone’s interested in partnering and experimenting at your news site, please contact me at [email protected]

I’ve been wondering about this ever since I bought land in Second Life for The Bakersfield Californian (and was widely scorned for it by other journalists), launched Virtual Bakersfield and later sold the virtual land for 200% of what we paid. We made $1,000 in real U.S. dollars off that experiment.

We still get e-mails from people asking us what happened to Virtual Bakersfield. It’s a good reminder to me of the value that local newspapers provide in terms of connecting people in their communities. I now believe content is really a subset of connections, as informing people about each other is a form of connecting them.

Dr Joe Webb

Defies logic? The news story can be found elsewhere. Beer brings people together…. Seriously, why will people pay $5 to buy a Mothers Day card, but not $3 for a newspaper. The Sunday newspaper has more features, has coupons, and lots of sports. Mom is the same Mom she always was. Both are on Sunday… hmmm. The comparison with Facebook’s $1 beer is not a valid comparison. They are two different products and two different circumstances. But it is a good hook to get attention for the article, and that was probably its best use.

Justin Waldron

Disney World doesn’t sell tickets to a theme park. They sell tickets to a perfect place where families laugh and play together, where divorce and the harsh realities of the world don’t exist.

Zynga doesn’t sell JPEG images, text, and code. We sell an emotional experience. We are the virtual Disney World of a new age. The place where people can go to be exactly what they want, surrounded by a world that’s exactly what they want.

News is not emotional, and emotion is power in purchasing.

My $.02

David Prizer

Good points on emotional attachment tied to the purchase of virtual goods. Maybe one of the attachments is that the virtual goods example is really giving it to someone else. Not sure that a feature on local news is an exciting gift to give, but I also would not pay a buck to give myself a virtual beer.

@Vaneeesa: I don’t think the line you mention is the premise of the post. In fact, I agree with your analysis, which is the hear of what I’m talking about there. People clearly do value the virtual elements more. I don’t think I’m unclear, but the post explains why I think my gut was wrong, and trying to understand how that virtual value could be applied to news business models.

@Vaneeesa: I don’t think the line you mention is the premise of the post. In fact, I agree with your analysis, which is the hear of what I’m talking about there. People clearly do value the virtual elements more. I don’t think I’m unclear, but the post explains why I think my gut was wrong, and trying to understand how that virtual value could be applied to news business models.

@Justin: Thanks for commenting here. Zynga is a great story, and was part of the inspiration for writing this.

That said, I want to disagree strongly about what you said: News IS emotional. Very much so. I’ve been in the newspaper business for 19 years, and I can say without hesitation that what we write, beyond the facts and figures, are stories (that is, when we’re at out best). And those stories provoke coversations, feelings and actions.

Also, reading the printed newspaper has always been a strong experience for people. That’s why so many people still pay to subscribe even though it’s all free online. Part of our problem online is that we have not found a way to re-create, or create a new, experience.

Joanna

Really appreciated this article. Although it resides on a secure site, is there any way I can share this article via Twitter with my community?

Jim Young

I am very selective about what I pay for in the virtual world. Jib Jab has been worth the subscription and I pay for one tech oriented e-zine. Otherwise I play the “social games” for free and do not buy the stuff with real money!

Not sure what the answer is. I think partnering with similar resources and a one prices gets access to all “networked” assets could work.

Kelli

Your article is similar to virtual goods in this way: It makes you want something you’re not actually going to get (i.e., an analysis of how virtual goods can help teach us how to make people pay for news), but you enjoy it anyway (the info about the virtual good market and advertising). =)

Gloria

I think if a real world political, social, and economic simulation game is invented news stories could be used as a way to guide each player. That way news is like a necessary and valued commodity to sucessfully play the game. For example if the news says 30% of NYC will get H1N1 then 30% of the game will get H1N1, but only those who read the real world news would know to get the simulated vaccination. Other conditions, such as the stock market, weather conditions, crime, and the cost of entertainment would work too.

Cheryl

@Gloria This is exactly how the newspaper works in Club Penguin. And I would send a virtual beer to a favorite columnist in an online newspaper if it would elevate the status of his byline. Certainly virtual goods in response to someone’s work would be better than a me-too comment on an article.

Also via Twitter today, I had series of responses from @Visionscaper. He suggested on problem was that news= text, and that text was easy to copy, whereas virtual goods were hard to copy and required a platform. He was “not optimistic about using virtual goods to express yourself related to news.”

That touched on some things I’d been thinking about this past week after the original post.

First, to @Visionscaper, I’d respond that news is far more than text. It’s data, multimedia, and also conversation, community, reputation, trust, and data. So I’d start my analysis of this from a broader view. I think those various pieces might contain a nugget of something that might lend itself to a virtual good.

Remember, the virtual good doesn’t have to be the “news” itself, or the story. It can be something about the experience or the feeling.

But the issue of platform is also something that’s come up a lot this week. My first thought was that even if we can figure out the virtual good/news relationship, the state of most news orgs Web sites is so poor that they might not be able to leverage them.

But as I talked this out more, I came back around to the example of Zynga. Zynga’s success has come through another platform: Facebook. The company hasn’t been booming just because it’s own site is so sophisticated, or social friendly. Rather, it’s leveraged someone else’s platform as well.

So it seems that if news orgs want to play with this idea, they don’t need to have the most advanced news site in the world. Rather, they need to move deeper in facebook or twitter or some other social media platform to create virtual goods that can be bought, sold and shared there.

None of this, necessarily answers the basic question of whether there’s a relationship between news and virtual goods. (Sorry, @Kelli!)

@Cheryl and @Gloria: Interesting thoughts. Sounds like I should check out Club Penguin, or at least get my kids to sign up and show me around.

One other stray thought: Someone in my own newsroom had an interesting suggestion. After initially dismissing this idea, he came around to wonder whether sports would be an interesting place to test this. For instance, where we live, there’s a rabid community surrounding the San Jose Sharks hockey team. Is there a way to tap into that passion and built-in community by allowing folks to create and send virtual jerseys, or hockey avatars?

Chris, the fact that you are merely asking the question reflects a fast-approaching trend every business will be dealing with – that is using such “game theory” to engage our changing expectations of experience and interaction. I see it happening now in every industry – albeit in its infancy – exploring how “gaming” can be applied to nearly everything.

At a time when the masses even having access to news was a revolution, the news was enough to expand our minds and experiences.

But today our everyday experiences are so rich, our ability to story tell across media so pervasive, and the move from consumption of information to our personal “ownership” of it have profound meaning and that must be translated into the news business.

Some of the ideas expressed here, like reputation and reward, are standard operating game theory concepts. The FB gesture or the Second Life object you are willing to purchase reflects a value well beyond the object – it is a means to an end of some sort (building reputation, alliances, or knowledge needed).

It is not that people don’t value the news. That recent study of what news we share clearly shows we value things that inspire us and make us think. We pass them along not because they are free, but because they provide us with reputation, to share excitement, or to demonstrate some knowledge.

What hinders the news industry is that they are too far removed from where our culture has moved. They are stuck on the object, not on the meaning of it to the individual.

Chris, the fact that you are merely asking the question reflects a fast-approaching trend every business will be dealing with – that is using such “game theory” to engage our changing expectations of experience and interaction. I see it happening now in every industry – albeit in its infancy – exploring how “gaming” can be applied to nearly everything.

At a time when the masses even having access to news was a revolution, the news was enough to expand our minds and experiences.

But today our everyday experiences are so rich, our ability to story tell across media so pervasive, and the move from consumption of information to our personal “ownership” of it have profound meaning and that must be translated into the news business.

Some of the ideas expressed here, like reputation and reward, are standard operating game theory concepts. The FB gesture or the Second Life object you are willing to purchase reflects a value well beyond the object – it is a means to an end of some sort (building reputation, alliances, or knowledge needed).

It is not that people don’t value the news. That recent study of what news we share clearly shows we value things that inspire us and make us think. We pass them along not because they are free, but because they provide us with reputation, to share excitement, or to demonstrate some knowledge.

What hinders the news industry is that they are too far removed from where our culture has moved. They are stuck on the object, not on the meaning of it to the individual.

So it seems that if news orgs want to play with this idea, they don’t need to have the most advanced news site in the world. Rather, they need to move deeper in facebook or twitter or some other social media platform to create virtual goods that can be bought, sold and shared there.

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